Iraq

8:38 am

Sun June 15, 2014

Militants' Advance In Iraq Agitates Oil Markets

Cars pack a Kurdish checkpoint as residents flee Mosul in northern Iraq. The city was overrun by Islamic militants last week.

Dan KitwoodGetty Images

When Sunni militants began seizing broad swathes of territory across northern Iraq last week, global oil markets shrugged it off. After all, instability in Iraq is nothing new.

But that all changed on Wednesday, when the insurgents swept into the oil refinery town of Baiji, says Robert McNally, president of the Rapidan Group, an energy consulting firm. The price of oil climbed nearly 4 percent in just a few short days.

"This jaw-dropping blitz assault ... and the threat it posed to the Baiji refinery, the Baiji electrical power plant, and really the stability of Iraq itself, just caused the market to panic," McNally says.

Insurgents surrounded the refinery, but were not able to seize it. For now, it remains under government control, guarded by Iraqi special forces. The refinery is the largest in Iraq, but it's used only for domestic purposes.

The real concern for the global markets — and the entire global economy — is about securing the flow of crude oil out of Iraq's main oil fields. They are clustered around the city of Basra, in the far south of the country at the tip of the Persian Gulf. It's a relatively long way from militant positions now.

But Amrita Sen, chief oil market analyst with Energy Aspects in London, says that distance doesn't provide much relief, for two reasons.

"One, the militants are progressing towards the south very, very quickly," Sen says. "And two, the Iraqi army's complete inability to stop them ... The fear factor is huge in the market at the moment."

"The specter now is one of a sort of broad fragmentation and disintegration in Iraq, which eventually could spill over to the south and to Iraq's oil exports," he says.

Jim Burkhard, head of global oil market research at IHS, says militants don't have to occupy the oil fields; they can simply launch small attacks on the pipelines, much as they've done on export pipelines in the northern city of Kirkuk. But Burkhard says global oil markets would feel the pinch if anything happened to Iraqi exports.

"This summer we estimate the world will have about 2 to 2.5 million barrels per day of spare crude oil production capacity," he says. "That's the oil markets' shock absorber. That's how much we have to call on in case there's a disruption. ... Iraq exports about 2.5 million barrels per day, so that's why the market is particularly sensitive to these fast-moving developments in Iraq right now."

Iraq has the potential to double the amount of oil it exports each day, but the industry has been plagued with problems despite investment from western companies. Burkhard says the escalating violence not only adds to Iraq's woes, it's part of a broader geopolitical story that's unfolding.

"The situation between Russia and Ukraine is not settled ... Libya is in a very desperate situation right now; oil production is just a trickle," Burkhard says. "There's also concerns about Nigeria and Venezuala as well."

President Obama said on Friday that if there are disruptions in Iraq's oil supply, other producers in the Gulf are able to pick up the slack. But that will do little to calm market jitters that are driving up prices.

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Transcript

SCOTT SIMON, HOST:

Global oil markets reacted sharply to the instability in Iraq, climbing nearly four percent in just a few short days. So far, the violence has been a long way from the main oilfields and export facilities in the south where Sunni militants have few supporters. But the fighters' advance has the oil industry on edge. NPR's Jackie Northam has this report.

JACKIE NORTHAM, BYLINE: When Sunni militants began seizing broad swaths of territory across northern Iraq last week, global oil markets shrugged it off. After all, instability in Iraq is nothing new. But all that changed on Wednesday when the insurgents swept into the oil refinery town of Baiji, says Robert McNally, president of the Rapidan Group, an energy consulting firm. The price of oil climbed nearly four percent in just a few short days.

ROBERT MCNALLY: And this jaw-dropping blitz assault and the threat it posed to the Baiji refinery, the Baiji electrical power plant, and really, the stability of Iraq itself just caused the market to panic.

NORTHAM: Insurgents surrounded the refinery, but they were not able to seize it. For now, it remains under government control, guarded by Iraqi special forces. The refinery is the largest in Iraq, but it's used only for domestic purposes.

The real concern for global markets, the entire global economy, is about securing the flow of crude oil out of Iraq's main oil fields. They're clustered around the city of Basra in the far south of the country at the tip of the Persian Gulf. It's a relatively long way from militant positions now. But Amrita Sen, chief oil market analyst with Energy Aspects in London, says that distance doesn't provide much relief for two reasons.

AMRITA SEN: One, the militants are progressing towards the south very, very quickly. And two, the Iraqi Army's complete inability to stop them. The fear factor is huge in the market at the moment.

MCNALLY: The specter now is one of sort of broad fragmentation and disintegration in Iraq which eventually could spill over to the south and to Iraq's oil experts.

NORTHAM: Jim Burkhard, the head of global oil market research at IHS, says militants don't have to occupy the oil fields. They can simply launch small attacks on the pipelines, much as they've done on export pipelines in the northern city of Kirkuk. But Burkhard says the global oil markets would feel the pinch if anything happened to Iraqi exports.

JIM BURKHARD: In terms of just how sensitive the oil market is today, this summer, we estimate the world will have about two to two and a half million barrels per day of spare crude oil production capacity. That's the oil market's shock absorber. That's how much we have to call on in case there's a disruption. Iraq exports about two and a half million barrels per day. So that's why the market is particularly sensitive to these fast-moving developments in Iraq right now.

NORTHAM: Iraq has the potential to double the amount of oil it exports each day. But the industry has been plagued with problems despite investment from Western companies. Burkhard says this escalating violence not only adds to Iraq's woes, it's part of a broader geopolitical story that's unfolding.

BURKHARD: The situation between Russia and Ukraine is not settled. Libya is in a very desperate situation right now. Oil production is just a trickle. And there's also concerns about Nigeria and Venezuela, as well. So the situation in Iraq is worrisome, but it's also part of a broader picture, which, you know, has raised a lot of concerns in the global oil market.

NORTHAM: President Obama said Friday that if there are disruptions in Iraq's oil supply, other producers in the Gulf are able to pick up the slack. But that would do little to calm market jitters that are driving up prices. Jackie Northam, NPR News, Washington. Transcript provided by NPR, Copyright NPR.